Tuesday Markets: Forex Market dead 94 days
By Paneetha Ameresekere
The interbank foreign exchange (FX) market was ‘dead’ for the 94th consecutive market day to yesterday with all trades in the FX market, made worse by bank-client trades too since midnight last Monday (6 September) , having to be executed under a controlled exchange rate (ER) regime of between Rs 200-203 to the dollar, thereby aiding in the spawning of a black market. Even at the controlled ER of Rs 203, the ER will have had depreciated by 7.69 per cent (Rs 14.50) in the calendar year to yesterday and year on year by 10.09 per cent (Rs 18.60) thereby causing cost-push inflation as Sri Lanka is an import dependent economy.
As at 31 December 2020, in the interbank FX market, beginning with ‘cash’ and going up to “one week’s forwards, the ER was trading at a seemingly inflated value of Rs 187.50/188.50 to the dollar in two way quotes due to CBSL controls, while a year ago due to lesser controls, the benchmark ‘spot’ was trading in the market at Rs 184.30/40 to the dollar in two way quotes.
‘Spot’ trades are settled after two market days from the date of trading. Having a dead interbank FX market, supported by FX controls lead to an era of shortages, queues, nepotism, cronyism, corruption and rationing, reminiscent of the era the country experienced 44 years ago over a seven-year period from 1970-77, where the then Government in power practiced a closed economy.
NFOs Top Rs 43B
The bourse suffered net foreign outflows (NFOs) for the third consecutive market day to yesterday with a figure of Rs 50.08 million due to nagging uncertainty, increasing NFOs to Rs 42.56 billion in the calendar year to yesterday, a YoY increase of Rs 7.52 billion (21.47 per cent). In the 166 market days that have transpired in the calendar year to yesterday, the bourse has suffered NFOs in 146 (87.95 per cent) of those days due to foreign investor panic. Last year, due to similar foreign investor panic, the bourse suffered a record Rs 51.04 billion worth of NFOs. In the 207 market days that transpired last year, the bourse suffered a record NFOs in 90.82 per cent (188) of those days. Nonetheless, the bourse made pyrrhic gains yesterday, with the benchmark ASPI increasing by 1.82 per cent to 8,692.88 points and the more sensitive S&P SL 20 Index by 1.63 per cent to 3,256.32 points on a Rs 3.59 billion turnover and on a share volume of 148.75 million.
CBSL upped the maximum administered yield (MAY) of the 364 day maturity by seven basis points (bps) week on week to a 64 week high of 6.12 per cent due to inflationary pressure for today’s Treasury (T) Bill auction, CBSL data last Friday showed. A total of Rs 39,500 million worth of face value T Bills are being offered at tomorrow’s auction with the splits being Rs 12,000 million 91-day maturities, Rs 12,500 million 182-day maturities and Rs 15,000 million 364-day maturities, respectively. Meanwhile, the total value of maturities to be settled on Friday (17 September) which coincides with the settlement date of the aforesaid auction is Rs 28,685 million, equivalent to 72.62 per cent of Wednesday’s total offering. Their splits are 91-days (Rs 14,830 million), 182-day (Rs 8,985 million) and Rs 4,870 million 364 day maturities, respectively. However, as CBSL/GoSL wants to artificially maintain a low interest rate regime to minimise GoSL’s borrowing costs and also to spur growth, what usually happens at these auctions currently is that CBSL allows the 91-day maturity to be oversubscribed and the other two maturities to be undersubscribed or even rejected due to the market asking for higher yields, with the settlements due next Friday met from the oversubscribed 91-day maturities and if insufficient, by demand pull inflationary money printing